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By Dr. James M. Dahle, WCI Founder
Warren Buffett and Charlie Munger introduced the investing world to the concept of “too hard.” Charlie likes to say there are three boxes on Warren's desk: an inbox, an outbox, and a “too hard” box. What does he mean by that? Buffett and Munger are in the business of evaluating companies for sale to see if they have an easy-to-understand business model, a wide moat keeping competitors out of their profits, and a fair price for those earnings. If it takes too much effort to figure all of that out, it goes into the “too hard” box, even though it may be a perfectly good investment.
Buffett explains, “The size of your circle of competence does not really matter all that much, but knowing precisely where the boundaries are is critical.”
In investing, there are no called strikes. It's fun to pretend that just because we know a lot about one thing, we know a lot about everything. Deep down, we all know that isn't true. Since we do not have to invest in everything to be successful, some of those “pitches” that we let go right by will be good investments. Maybe there are great rewards in the “too hard” pile if you would just take the time to get into the weeds, but there is an opportunity cost to doing that and a fair chance that you'll get burned if you overestimate the size of your circle of competence.
Today, I want to give you permission to say, “Too hard,” and not feel bad about doing it. Let's talk about some things that you might very reasonably put in your “too hard” pile and simply ignore. Maybe you'll choose to do a few of the things on this list, but if you're trying to do half or more of them, you're probably way outside your circle of competence with at least some of them.
#1 Options and Other Derivatives
We had a podcast guest on earlier this year that most people call Big ERN. He is a Ph.D. who used to work in financial services. Part of his current strategy involves watching the markets for a good part of the day several days a week and spending a few minutes several times a week putting in options trades. I had a number of listeners write in or discuss it in the WCI communities looking for more details. I'm not a big fan of options, and one of the reasons is that it goes into my “too hard” pile. I'm not just talking about the time requirement either (watching the market and putting in trades every week is not my idea of fun), I'm also talking about the intellectual requirements. If you don't really get the Black-Scholes equation, maybe you should not be trading options. What are the odds that you know more than the person on the other side of the trade?
But guess what? You don't have to worry about any of that to reach all of your financial goals, especially if you already have a high income like those who read this blog.
Understanding the crypto world can be difficult. While it doesn't take that long to learn the basics, you can spend a lifetime learning the nuances. And even once you have that knowledge, it doesn't make it any easier to predict the future of a given cryptocurrency. I've had a lot of “crypto bros” tell me they've spent 1,000 hours or more “going down the rabbit hole,” learning about crypto before they felt comfortable investing in it. Something I spend 1,000 hours on isn't an asset class; it's a part-time job, and I'll have to deduct the value of my time to calculate a true meaningful return. Is there anything wrong with just ignoring it and putting it in the “too hard” box? Not as far as I can tell. Some of us spend a lot of time learning about it and analyzing it, and we still don't bother investing in it.
Non-fungible tokens are another market where it takes a lot of time to wrap your head around the technological aspect of it. Many figure, why bother? Can you really blame them?
Art is not as hard to understand as cryptoassets or NFTs, but figuring out which pieces are likely to appreciate and which are not can be just as challenging.
If you thought art was mixing business with pleasure, you haven't seen anything yet. Now you need more than one sense to understand the value. Plus, you have to resist drinking the appreciated bottles to avoid capital gains taxes. To me, that sounds particularly challenging for a wine lover.
#6 Private Real Estate
Real estate is not a particularly complicated investment: the property appreciates and the tenants pay rent. You pay all your expenses and keep what is left. Still, when faced with having to choose which managers to trust and pouring over 100+ page PPMs trying to figure out if the fee structure is fair and the proforma is accurate just to have the chance to receive a late K-1 requiring you to file in four states, it's hard to blame anyone who finds private, passive real estate “too hard.” And even that is nothing compared to going out to purchase and manage your own properties.
#7 Index Universal Life Insurance
While term life (pure insurance) is easier to understand and compare than whole life, you go to a whole new level when you start looking at IULs. There are so many moving parts that it is relatively easy to hide a bad deal for the purchaser and a particularly good deal for the issuer. I'm often asked to help someone decide if they should keep a policy they should have never bought in the first place. Who needs that kind of hassle in their life? It's “too hard.” Just move on.
A trust usually takes multiple visits with an attorney and thousands of dollars to get into place. Then, you are rewarded with spending weeks funding it and the hassle of dealing with an additional entity in your life. Add in multiple LLCs, FLPS, trusts, and more complicated asset protection and estate planning schemes, and I can now understand why I keep running into docs who are worth in the mid-eight figures who have decided to just pay 40% in estate tax rather than deal with the hassle. “Probate is an heir problem, not a me problem. My kids will still get plenty after the taxes are paid.”
#9 Stock Trading Schemes
I often run into people with elaborate (and usually proprietary) trading algorithms. While most of them are probably garbage, all of them fall into the category of “too hard” for me. Just like with options, if my investments don't let me disappear into the wilderness for weeks at a time, they're not facilitating financial freedom, which is the whole point of investing for me. They're “too hard.”
#10 Stock Picking
Some people love learning the details about all of the publicly traded companies out there. Once you find out that index funds beat 80%-90% of stock pickers in the long run (and even more after-tax, after-fee, and after the value of your time), you will probably conclude, as I have, that trying to be a successful stock picker is “too hard.”
#11 Managing Individual Munis
Some people pick muni bonds themselves or even pay someone else to do it rather than just sticking their money into a boring, old, liquid, diversified muni bond fund at Vanguard. I'm not sure if it is the exclusivity or the control that they like, but you've really got to like investing to want to pick your own bonds. It always makes me think, “You know you can pay someone like 10 basis points a year to do that for you, right?”
Some people don't even want to bother trying to understand Treasury Inflation Protected Securities (TIPS). It's only one more moving part than a treasury bond, but that still makes them “too hard” for many people to include in their portfolio.
#13 I Bonds
Investing in I bonds requires you to open a new account (or two or three) at Treasury Direct with yet another password. You also have to type in your password manually each time using an on-screen keyboard. “Too hard” for some.
#14 Backdoor Roth IRAs
Based on how many white coat investors have screwed up what I find to be a relatively simple process, the Backdoor Roth IRA should be in the “too hard” pile for a lot of folks.
#15 Tax-Loss Harvesting
A wash sale isn't too tough to understand, but the benefit is somewhat limited as well. For some people, tax-loss harvesting is only worth $1,000 a year or even less. I can't blame someone who doesn't want to deal with the process and the inevitably more complicated, less automatable portfolio it requires.
#16 Saving Receipts with an HSA
Some people don't actually spend from their Health Savings Account (HSA) each year. They let the money keep growing and save the receipts for an eventual huge tax-free withdrawal many years into the future. I have tried, but I do a terrible job of keeping track of all the receipts. It's “too hard.”
As you can see, simplicity is valuable. But even more importantly, when you opt for more complexity in your financial life for whatever benefit, make sure you stay within your circle of competence. An old investing adage says, “Don't invest in what you don't understand.” I couldn't agree more. Today, you have my permission to ignore anything on this list and leave it out of your financial life for being “too hard.”
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What do you think? Have you been burned by something you didn't really understand? What goes into your “too hard” pile and why? Comment below!